Pound Rises to 2-Week High as Osborne Keeps BOE Inflation Target

The pound rose to a two-week high versus the dollar as Chancellor of the Exchequer George Osborne said the government will keep the Bank of England’s 2 percent inflation target, damping bets he would ease it to spur growth.

The U.K. currency gained versus most of its 16 major counterparts as minutes of the Bank of England’s March policy meeting showed some policy makers saying further bond purchases may cause an “unwarranted depreciation of sterling.” Osborne said in parliament he would allow officials greater flexibility in meeting the central bank’s inflation mandate and may permit the provision of forward guidance on interest rates. Government bonds pared a decline.

“The minutes obviously did the damage to sterling bears,” said Neil Mellor, a foreign-exchange strategist at Bank of New York Mellon Corp. in London. The official change in the central bank mandate probably won’t “entail a particular shift in policy because they are already doing it,” he said.

The pound strengthened 0.2 percent to $1.5129 at 4:54 p.m. London time, after rising to $1.5186, the highest since March 5. It earlier fell as much as 0.5 percent. Sterling weakened 0.3 percent to 85.59 pence per euro.

Sterling may resume its decline against the dollar and depreciate to $1.44 in six months because as U.S. economic recovery outpaces that in the U.K., Bank of New York Mellon’s Mellor said.

Asset Purchases

Sterling has tumbled 4.6 percent this year, the second-worst performance after the yen of the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. It fell amid speculation the government would waive the Bank of England’s inflation target, paving the way for additional asset-purchases that tend to debase a currency.

The central bank last increased the target for bond purchases in July, raising it by 50 billion pounds to 375 billion pounds.

Osborne also said that the Office for Budget Responsibility halved its economic growth estimate for this year to 0.6 percent. Britain’s economy will expand 1.8 percent next year, compared with a previous estimate of 2 percent, he added.

Jobless claims fell 1,500 from January to 1.54 million, the Office for National Statistics said today in London. The median forecast of 27 economists in a Bloomberg survey was for a drop of 5,000. That added to recent data that has fueled concern that Britain’s economic slump persisted in the first quarter, after a 0.3 percent contraction in the final three months of 2012.

BOE Minutes

The Monetary Policy Committee voted 6-3 to keep asset purchases unchanged, the minutes of the March 6-7 meeting showed. The majority said with inflation above the BOE’s 2 percent target, there was a risk that adding to stimulus “could lead to inflation expectations drifting upwards.”

“The comments were more of a surprise than the actual vote,” said Neil Jones, head of European hedge fund sales at Mizuho Corporate Bank Ltd. in London. “It’s the first time we’ve seen verbal intervention in support of sterling in the past few years. This could be a nail in the coffin for further quantitative easing.”

Gilt Yields

Ten-year gilt yields rose five basis points, or 0.05 percentage point, to 1.87 percent after climbing as much as 11 basis points, the most since Feb. 13. The 1.75 percent security due in September 2022 declined 0.385, or 3.85 pounds per 1,000-pound face amount, to 98.925.

Gilt sales will decline 8.4 percent next financial year as a planned cash transfer from the Bank of England’s bond holdings to the government reduces the Treasury’s borrowing needs.

Britain will sell 151 billion pounds of gilts in the 12 months started April, the Debt Management Office said today. That compares with 164.8 billion pounds in the current fiscal year.

Inflation has stayed above the Bank of England’s 2 percent target for each of the past 39 months. The next Monetary Policy Committee decision is scheduled for April 4 and Governor Mervyn King is due to be replaced in July by Mark Carney, who currently heads Canada’s central bank.

Inflation Expectations

Investors increased their inflation expectations today, according to data compiled by Bloomberg.

The U.K. five-year five-year forward break-even rate rose to as much as 3.814 percent today, the highest since May 18, 2011. The measure shows how much traders anticipate consumer prices will rise during a period of five years starting in 2018.

The 10-year break-even rate, a gauge of expectations of inflation derived from a difference in yield between gilts and index-linked securities, added one basis point to 3.28 percentage points.

U.K. gilts returned 1.2 percent this month through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 0.7 percent, and Treasuries fell 0.1 percent.

Before it's here, it's on the Bloomberg Terminal.